Growth for businesses often means fighting for and sustaining market share. This would require having a competitive edge and often involves improving productivity — whether in the manufacture of goods or the delivery of services. 

At the national level, productivity is an important pillar for economic growth. For Malaysia, productivity is recognised as a game changer under the 11th Malaysia Plan (11MP). Under the economic targets for 2020, there is potentially billions of ringgit of value-add to be gained from an uplift in productivity growth alone across the Malaysian economy.

However, over the past three to four decades, we have witnessed a slowdown in productivity growth globally. In some countries, this has led to overall slowing in economic growth and employment. In Malaysia, specifically, while we still see growth in productivity, its gap relative to gross domestic product (GDP) growth is widening. This signals a still predominantly input-driven economy reliant on the injection of capital and labour.

This input-driven growth model, however, is not sustainable. It will become costlier over time, with every unit of input injected into the economy yielding a lesser amount of GDP or subject to decreasing marginal returns. 

Moving towards productivity-driven growth is inevitable. This also offers opportunities for a sustainable increase in wages that can subsequently drive wealth and consumption levels. In many instances, income differentials across countries are primarily driven by productivity differentials.

Elusive productivity growth

Large economies such as the US, Japan, South Korea and Brazil have seen a decline in productivity in recent years despite increases in labour and capital contribution. This has been attributed to a number of factors, including limited diffusion of innovation, poor adoption of technology across industries as well as the prevalence of sub-scale businesses with limited ability to invest and innovate.

A more fundamental question is whether countries must continuously work harder with greater labour and capital deepening, and not necessarily smarter, as productivity (and innovation) becomes increasingly elusive. Some have even suggested that the era of big innovations that are able to deliver high productivity growth is over.

The reality, however, is probably that productivity is not dead (or elusive) and that innovative breakthroughs are imminent. The rapid increase in the capability, ubiquity and connectivity of new technologies, for instance, means productivity breakthroughs are likely just “around the corner”. It means many sectors will be impacted and some, like manufacturing, will be the obvious ones to look for productivity growth. Labour intensity will vary with new jobs being created and new skills required.

Today, a number of sectors in Malaysia show relatively low productivity levels compared with other countries or with the 2020 productivity growth targets under the 11MP. Retail, logistics, tourism, construction and manufacturing are some of the sectors where there is plenty of opportunities for a further boost in productivity.Adopting technology or simply changing business practices and operations within these sectors can deliver a substantial impact.

Can Malaysia overcome the productivity challenge?

There are five fundamental questions that can help us gain a perspective on productivity, with insights into where Malaysia stands today as an economy intent on achieving sustained growth going forward.

1)    Is productivity top-of-mind and embedded into the day-to-day work culture and/or processes of businesses and organisations? The concept of productivity as discussed by economists and policymakers can be vague and sometimes misunderstood for the overall impact it can have on an individual, an entrepreneur, a business or even the nation as a whole. Monitoring, measuring and communicating on productivity and required improvements continue to be a challenge that needs to be unlocked.

2)    Are we building a workforce ready to unleash productivity today and for the future? Growth in high-skilled workers in Malaysia is outpaced by the increasing number of low and semi-skilled workers, including in key sectors of the economy such as manufacturing, services and agriculture. Many businesses have yet to demonstrate the ability or desire to embrace change and new ways of doing things that will reduce their reliance on labour-intensive, lower-skilled practices.

3)    Is technology effectively helping businesses shift towards improved efficiencies and performance? Technology investments today in key economic sectors such as manufacturing remain relatively low, despite pockets of adoption of robotics in selected sub-sectors. With the onset of Industry 4.0, manufacturers will see a step change in production performance with the possibility of gathering and analysing data across machines and the enabling of faster, more flexible and more efficient processes to produce higher quality goods at reduced costs. But Malaysian manufacturers risk not capturing this shift in manufacturing productivity if ambitions are not set high enough and efforts are not accelerated in this direction.

4)    Are we making the right trade-offs with national programmes to enable key segments of the economy? The critical mass of Malaysian small and medium enterprises (SMEs) for instance, often has limited scale and ability to invest in measures to improve productivity. But SMEs are not all created equal. In sectors such as retail, where SMEs contribute a large proportion to the sector GDP, a targeted effort via national programmes to assist and enable ambitious and high potential SMEs could make a substantial difference to their productivity and competitiveness. For others, however, achieving productivity growth will remain elusive regardless of enabling efforts.

5)    Is the regulatory environment in Malaysia conducive to higher productivity? While efforts are in place to reduce the regulatory burden for businesses, the cost of doing business still remains relatively high compared with more developed countries. Nuances in regulations between the federal and state governments, for example, can potentially impose hurdles and additional constraints on businesses and entrepreneurs. This in turn will impact productivity. Key to reducing this regulatory burden lies in a decisive, whole-of-government approach, with accountability in conducting frequent regulatory reviews. Whether this can be carried out remains to be seen.

While productivity improvements may take place when addressing these five questions, we may need sector-specific strategies and not a “one-size-fits-all” approach as the complexities involved in various sectors are unique when manifested for growth or growth opportunities. For instance, in agriculture, there is an impending need to prioritise certain crops that have full value chain potential over others. Similarly, in the services sector, productivity gaps relative to potential exist across sub-sectors such as retail, F&B, logistics and healthcare, but the solution for each will be different.

We have to now ask if the stakeholders of influence, policymakers, industry players and Malaysians in general understand and acknowledge the importance of productivity, and if we are moving in the right direction with the right measures for productivity and the appropriate initiatives and intervention mechanisms. We also need to ask if our workforce is continuously upskilling and reskilling itself to meet the demands of the dynamic workplace, and is able to remain competitive as productive resources of the nation. Productivity-led growth is the only way forward.

Nor Azah Razali is a partner and managing director for the Kuala Lumpur office of The Boston Consulting Group

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